UNITED
STATES
SECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549

Form
10-Q

(Mark One)

þ

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2012

OR

¨

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission
file number: 000-53352

Titanium
Asset Management Corp.

(Exact name of registrant as specified in
its charter)

Delaware

20-8444031

(State or other jurisdiction of

(I.R.S. Employer

incorporation or organization)

Identification No.)

777 E. Wisconsin Avenue

Milwaukee, Wisconsin

53202-5310

(Address of principal executive offices)

(Zip Code)

(414) 765-1980

(Registrant’s
telephone number, including area code)

Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days. Yes þ
No ¨

Indicate
by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such
shorter period that the registrant was required to submit and post such files). Yes þ
No ¨

Indicate by check mark
whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.
See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company”
in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer ¨

Accelerated filer ¨

Non-accelerated filer ¨

Smaller reporting company þ

(Do not check if a smaller
reporting company)

Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨
No þ

At November 9, 2012,
there were 20,634,232 shares of the registrant’s common stock outstanding.

TABLE OF CONTENTS

Page

PART I. FINANCIAL INFORMATION

1

Item 1.

Financial Statements

1

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

See Notes to Condensed Consolidated Financial
Statements contained herein and the Notes to Consolidated Financial Statements in the Titanium Asset Management Corp. Annual Report
on Form 10-K for the year ended December 31, 2011 (the “2011 Form 10-K”).

1

Titanium Asset Management Corp.

Condensed Consolidated Statements of
Operations

(unaudited)

Three Months Ended September 30,

Nine Months Ended September 30,

2012

2011

2012

2011

Operating revenues

$

5,779,000

$

5,390,000

$

16,730,000

$

16,292,000

Operating expenses:

Administrative

5,051,000

5,491,000

15,210,000

16,258,000

Amortization of intangible assets

2,401,000

1,391,000

7,203,000

4,000,000

Impairment of goodwill

-

-

-

3,500,000

Total operating expenses

7,452,000

6,882,000

22,413,000

23,758,000

Operating loss

(1,673,000

)

(1,492,000

)

(5,683,000

)

(7,466,000

)

Other income

Interest income

23,000

21,000

61,000

66,000

Net realized gains (losses) on investments

13,000

(17,000

)

6,000

(18,000

)

Income (loss) from equity investees

177,000

(78,000

)

452,000

342,000

Loss before income taxes

(1,460,000

)

(1,566,000

)

(5,164,000

)

(7,076,000

)

Income tax benefit

-

-

-

-

Net loss

$

(1,460,000

)

$

(1,566,000

)

$

(5,164,000

)

$

(7,076,000

)

Earnings (loss) per share

Basic

$

(0.07

)

$

(0.08

)

$

(0.25

)

$

(0.34

)

Diluted

$

(0.07

)

$

(0.08

)

$

(0.25

)

$

(0.34

)

Weighted average number of common shares outstanding:

Basic

20,634,232

20,634,232

20,634,232

20,634,232

Diluted

20,634,232

20,634,232

20,634,232

20,634,232

See Notes to Condensed Consolidated Financial
Statements contained herein and the Notes to Consolidated Financial Statements in the 2011 Form 10-K.

2

Titanium Asset Management Corp.

Consolidated Statements of Comprehensive
Loss

(unaudited)

Three Months Ended September 30,

Nine Months Ended September 30,

2012

2011

2012

2011

Net loss

$

(1,460,000

)

$

(1,566,000

)

$

(5,164,000

)

$

(7,076,000

)

Other comprehensive income items:

Unrealized gains (losses) on available for sale securities

18,000

(11,000

)

28,000

(32,000

)

Net losses (gains) reclassified from accumulated other comprehensive income to earnings

(3,000

)

-

3,000

4,000

Income tax on other comprehensive income items

-

-

-

-

Other comprehensive income items, net of tax

15,000

(11,000

)

31,000

(28,000

)

Comprehensive loss

$

(1,445,000

)

$

(1,577,000

)

$

(5,133,000

)

$

(7,104,000

)

See Notes to Condensed Consolidated Financial
Statements contained herein and the Notes to Consolidated Financial Statements in the 2011 Form 10-K.

See Notes to Condensed Consolidated Financial
Statements contained herein and the Notes to Consolidated Financial Statements in the 2011 Form 10-K.

4

Titanium Asset Management Corp.

Condensed Consolidated Statements of
Cash Flows

(unaudited)

Nine Months Ended September 30,

2012

2011

Cash flows from operating activities

Net loss

$

(5,164,000

)

$

(7,076,000

)

Adjustments to reconcile net loss to net cash used in operating activities:

Amortization of intangible assets

7,203,000

4,000,000

Impairment of goodwill

-

3,500,000

Depreciation

96,000

89,000

Net realized losses (gains) on investments

(6,000

)

18,000

Income from equity investees

(452,000

)

(342,000

)

Income distributions from equity investees

96,000

438,000

Changes in assets and liabilities:

Decrease (increase) in accounts receivable

(262,000

)

1,413,000

Decrease (increase) in other current assets

48,000

(12,000

)

Increase (decrease) in accounts payable

(1,000

)

13,000

Decrease in other current liabilities

(169,000

)

(1,015,000

)

Net cash provided by operating activities

1,389,000

1,026,000

Cash flows from investing activities

Purchases of investments

(5,748,000

)

(4,563,000

)

Sales and redemptions of investments

3,686,000

3,916,000

Capital distributions from equity investee

1,185,000

-

Purchases of property and equipment

(89,000

)

(130,000

)

Acquisitions of subsidiaries, net of cash acquired

-

(4,000,000

)

Net cash used in investing activities

(966,000

)

(4,777,000

)

Net increase (decrease) in cash and cash equivalents

423,000

(3,751,000

)

Cash and cash equivalents:

Beginning

2,787,000

4,698,000

Ending

$

3,210,000

$

947,000

See Notes to Condensed Consolidated Financial
Statements contained herein and the Notes to Consolidated Financial Statements in the 2011 Form 10-K.

5

Titanium Asset Management Corp.

Notes to Condensed Consolidated Financial
Statements

(unaudited)

Note 1 – General

Titanium Asset Management
Corp. (the “Company”) was incorporated on February 2, 2007. The Company commenced operations as a special purpose acquisition
company to acquire one or more operating companies engaged in the asset management business. On October 1, 2007, the Company acquired
all of the voting common stock of Wood Asset Management, Inc. (“Wood”) and all of the membership interests of Sovereign
Holdings, LLC (“Sovereign”), two asset management firms. On March 31, 2008, the Company acquired all of the outstanding
capital stock of National Investment Services, Inc. (“NIS”), a third asset management firm. After such business combinations,
the Company ceased to act as a special purpose acquisition vehicle. On December 31, 2008, the Company acquired all of the membership
interests of Boyd Watterson Asset Management, LLC (“Boyd”), a fourth asset management firm. The Company’s strategy
is to manage these operating companies as an integrated business.

The accompanying unaudited
interim condensed consolidated financial statements have been prepared by the Company, in accordance with accounting principles
generally accepted in the United States (“GAAP”) and pursuant to the rules and regulations of the Securities and Exchange
Commission (the “SEC”) and, in the opinion of management, include all adjustments (all of which were of a normal and
recurring nature) necessary for a fair statement of the information for each period contained therein.

The preparation of
consolidated financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosures of contingent assets and liabilities as of the date of the consolidated
financial statements, and the reported amounts of revenues and expenses during the reporting period. These estimates are based
on information available as of the date of these consolidated financial statements. Actual results could differ materially from
those estimates.

The information included
in this Quarterly Report on Form 10-Q should be read in conjunction with Management’s Discussion and Analysis of Financial
Condition and Results of Operations included herein and in the 2011 Form 10-K and the Consolidated Financial Statements and the
Notes thereto included in the 2011 Form 10-K.

Note 2 – Adoption of New Accounting
Standards

The
Company’s significant accounting policies are discussed in the Notes to the Company’s Consolidated Financial Statements
in the 2011 Form 10-K.

In June 2011, the FASB
issued new guidance on the presentation of comprehensive income that requires entities to present each component of net income
along with the total net income, each component of other comprehensive income along with a total for other comprehensive income,
and a total amount for comprehensive income. The guidance provides entities with the option to present the information in either
a single continuous statement of comprehensive income or in two separate but consecutive statements and eliminates the previous
option to present the components of other comprehensive income as part of the statement of changes in stockholders’ equity.
The guidance became effective for interim reporting beginning on or after December 31, 2011, with retrospective application required.
The Company has presented the information regarding comprehensive income in consecutive statements and the new guidance had no
impact on its consolidated financial statements.

6

Note 3 – Investments

The Company’s investments include
a current portfolio of debt securities that are accounted for as available-for-sale securities. The Company’s investments
in equity investees include investments in two of its managed funds and are accounted for using the equity method of accounting
because the Company has significant influence over the management of the funds.

Current portfolio of debt securities

Amortized cost

Unrealized gains

Unrealized losses

Fair value

September 30, 2012

$

5,068,000

$

31,000

$

(10,000

)

$

5,089,000

December 31, 2011

$

3,000,000

$

7,000

$

(17,000

)

$

2,990,000

Debt securities accounted for as available-for-sale
and held at September 30, 2012 mature as flows:

Amortized cost

Fair value

Within one year

$

3,577,000

$

3,594,000

After one year but within five years

$

1,491,000

$

1,495,000

The following table provides a summary
of the changes in and results of investment activities. The specific identification method is used to determine the cost basis
of investments sold and the realized gain or loss.

Three Months Ended September 30,

Nine Months Ended September 30,

2012

2011

2012

2011

Proceeds from sale

$

1,372,000

$

1,383,000

$

3,686,000

$

3,916,000

Gross realized gains on sales

21,000

2,000

31,000

14,000

Gross realized losses on sales

(8,000

)

(19,000

)

(25,000

)

(32,000

)

Unrealized gains and losses

18,000

(11,000

)

28,000

(32,000

)

Net gains (losses) reclassified out of accumulated other comprehensive income to earnings

3,000

-

(3,000

)

(4,000

)

7

Note 3 – Investments (continued)

Investments in Equity Investees

Investments in equity investees include
the Company’s investment in the Titanium TALF Opportunity Fund (the “TALF Fund”), which it organized for its
clients to invest in securities participating in the Term Asset-Backed Securities Loan Facility (“TALF”) of the Federal
Reserve Bank of New York. The Company is the managing member of the TALF Fund and serves as the investment manager for the TALF
Fund for which it receives management fees. Because the Company has an equity interest in the TALF Fund and has significant influence
over the TALF Fund’s daily activities through its role as managing member and investment manager, the Company accounts for
this investment using the equity method of accounting.

During June 2012, substantially all of
the TALF Fund securities were liquidated and converted to cash equivalents. The remaining assets of the TALF Fund were distributed
to the respective investors, including the Company in September 2012.

Investments in equity investees also include
the Company’s investment in the Titanium Absolute Return Fund (the “TARF Fund”), formerly the NIS Fixed Income
Arbitrage Fund, LTD. The Company is the managing member of the TARF Fund and serves as the investment manager for the TARF Fund
for which it receives management fees. As of September 30, 2012, the Company’s investment in the TARF Fund represents approximately
14% of the total investments in the TARF Fund. Because the Company has an equity interest in the TARF Fund and has significant
influence over the TARF Fund’s daily activities through its role as managing member and investment manager, the Company accounts
for this investment using the equity method of accounting.

The activity related to the Company’s
investment in equity investees for the nine months ended September 30, 2012 and 2011 is as follows:

Investments in equity investees at
January 1, 2011

$

5,898,000

Equity in income of equity investees

342,000

Income distributions

(438,000

)

Investments in equity
investees at September 30, 2011

$

5,802,000

Investments in equity investees at January 1, 2012

$

4,707,000

Equity in income of equity investees

452,000

Income distributions

(96,000

)

Return of capital distributions

(1,185,000

)

Investments in equity investees at September 30, 2012

$

3,878,000

Note 4 – Acquisition Obligations

In connection with the acquisitions of
Wood, Sovereign, NIS and Boyd, the acquisition agreements provided for deferred fixed payments and contingent payments based on
assets under management or revenues at specified future dates.

The acquisition agreement for Wood provided
for contingent payments related to revenue and assets under management milestones during the three-year period after closing. In
November 2011, the Company made the final payment to the sellers totaling $540,000 in cash based on Wood’s assets under management
as of September 30, 2011. This contingent payment resulted in an additional $540,000 of goodwill in 2011.

There are no further fixed or contingent
acquisition obligations related to the acquisitions.

8

Note 5 – Goodwill and intangible
assets

The Company earns referral fees on clients
referred to a hedge fund manager with whom we have a referral arrangement. Following the end of the first quarter of 2011, the
Company was notified by the hedge fund manager of redemptions and a reduction in its referral fee rates that significantly exceeded
the estimates that were received in connection with the 2010 year end assessment of goodwill. From ensuing discussions with the
management of hedge fund manager, the Company became aware of additional concerns with the relationship that may impact the marketing
relationship beyond the current contractual period. These factors caused the Company to further reduce its long-term forecast of
referral fee revenues and triggered an interim assessment of goodwill as of March 31, 2011. As a result of that assessment, the
Company concluded that goodwill had been impaired and recognized an impairment charge of $3,500,000 as the reduction in the forecast
long-term referral fee revenues had resulted in a reduced estimate of the Company’s value.

Note 6 – Stockholders’ Equity

The Company’s authorized capital
consists of 54,000,000 shares of common stock with a $0.0001 par value, 720,000 shares of restricted common stock with a $0.0001
par value, and 1,000,000 shares of preferred stock with a $0.0001 par value.

The restricted common stock
shares carried voting rights and had no rights to dividends except in the case of liquidation of the Company. The restricted
common stock shares would have converted on a one for one basis into shares of common stock if at any time within five years of
their issue the ten-day average share price of the common stock exceeded $6.90 or if there was a change in control (as defined
in the Company’s certificate of incorporation). Because none of the events that would have triggered conversion had
occurred prior to the five year anniversary of the issuance of the restricted common stock shares, all of the restricted
common stock shares were mandatorily redeemed at par value and cancelled as of March 2, 2012.

No preferred stock had been issued at September
30, 2012.

In connection
with the Company’s 2007 private placement, the Company issued 20,000,000 warrants that entitled the holder to purchase one
share of common stock at $4.00 per share. All of these warrants expired in June 2011.

As part of the private placement, the Company
granted an option to Sunrise Securities Corp. to acquire 2 million units at a price of $6.60 (each unit consisted of one share
of common stock and one warrant to acquire one share of common stock at $4.00 per share). Subsequent to the expiration of the warrants,
the options were only exercisable for one share of common stock at an exercise price of $5.50 per share. All of these options expired
in June 2012.

Note 7 – Income Taxes

At December 31, 2011, the Company had deferred
tax assets of $22,067,000 including the deferred tax benefits related to federal net operating loss carryforwards of approximately
$20,363,000 that expire between 2028 and 2031 and state net operating loss carryforwards totaling approximately $17,264,000 that
expire between 2023 and 2031.

In assessing the realizability of the Company’s
deferred tax assets, the Company considers all relevant positive and negative evidence in determining whether it is more likely
than not that some portion or all of the deferred tax assets will not be realized. The realization of the gross deferred tax assets
depends on several factors, including the generation of sufficient taxable income prior to the expiration of the net operating
loss carryforwards. Pursuant to FASB guidance, a cumulative loss in recent years is a significant piece of negative evidence to
be considered in evaluating the need for a valuation allowance that is difficult to overcome. Based on the pretax losses in 2008
through 2011, the Company determined that it was not appropriate to consider expected future income as the primary factor in determining
the realizability of its deferred tax assets. As a result, the Company has recognized valuation allowances that fully offset all
deferred tax assets as of December 31, 2011.

Based on the continuation of cumulative
losses, the Company continued to fully offset any additional deferred tax assets with additional valuation allowances during the
nine months ended September 30, 2012.

9

Note 8 – Earnings per Share

Basic earnings per share (“EPS”)
is computed by dividing net income or loss by the weighted average shares of common stock outstanding. Diluted EPS gives effect
to all dilutive potential shares of common stock outstanding during the period.

The computation of basic and diluted EPS
is as follows:

Three months ended September 30,

Nine months ended September 30,

2012

2011

2012

2011

Net loss

$

(1,460,000

)

$

(1,566,000

)

$

(5,164,000

)

$

(7,076,000

)

Basic and diluted weighted average shares of common stock outstanding

20,634,232

20,634,232

20,634,232

20,634,232

Basic and diluted EPS

$

(0.07

)

$

(0.08

)

$

(0.25

)

$

(0.34

)

Note 9 – Fair Value Disclosures

Under the FASB’s fair value requirements,
the fair values for assets and liabilities are to be disclosed based on three levels of input: Level 1 – quoted prices in
active markets for identical assets or liabilities; Level 2 – observable inputs other than Level 1 prices such as quoted
prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or
can be corroborated by observable market data for substantially the full term of the assets or liabilities; or Level 3 –
unobservable inputs that are supported by little or no market activity and that are significant to the fair value of assets or
liabilities. Level 3 assets and liabilities include financial instruments, the value of which is determined using pricing models,
discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires
significant judgment or estimation. The Company’s level 1 investments include investments in registered money market funds.

The Company measures the following assets
at fair values on a recurring basis:

Category used for Fair Values

Level 1

Level 2

Level 3

Assets at September 30, 2012

Cash and cash equivalents

$

3,210,000

$

-

$

-

Current securities available for sale – Debt securities

-

5,089,000

-

$

3,210,000

$

5,089,000

$

-

Assets at December 31, 2011

Cash and cash equivalents

$

2,787,000

$

-

$

-

Current securities available for sale – Debt securities

-

2,990,000

-

$

2,787,000

$

2,990,000

$

-

10

Note 10 – Contingencies

The Company’s subsidiary,
Sovereign, received a letter dated July 16, 2010 from a former client demanding that Sovereign compensate it for losses
related to allegedly unsuitable investments in approximately $30 million of various auction rate securities purchased on its
behalf by Sovereign. The former client has filed a claim against the underwriters for the purchased securities, but has not
to this point brought a claim against Sovereign. Management is in the process of evaluating this demand and the former
client’s allegations to determine whether there is any merit to them. In the interim, the Company has entered into a
tolling agreement with the former client that extends to August 10, 2013. At this preliminary stage, the Company cannot fully
determine the potential liability of the Company or the likelihood of an unfavorable outcome. In any event, management
believes the claim would be covered by insurance (up to $20 million), subject to the payment of deductible amounts by the
Company.

On October 25, 2011, a former client
of Sovereign filed suit in the State of Illinois Circuit Court against Sovereign, alleging negligence and breach of fiduciary
duty on the part of Sovereign in investing the former client’s assets in auction-rate securities. The claim alleges,
among other things, that Sovereign failed to conduct adequate due diligence into the auction-rate securities purchased for
the client’s account, and that the investment in the auction-rate securities was outside the former client’s
investment guidelines. The suit seeks $4.7 million in damages, plus pre-judgment interest. Previously, the former client had
made a similar claim under federal securities statutes and that federal claim was dismissed with prejudice on October 26,
2010. The Company filed a motion to dismiss the state claim but that motion was denied May 11, 2012. While management
believes the state claim is without merit and intends to defend vigorously against this action, at this preliminary stage, it
cannot fully determine the potential liability of the Company, the likelihood of an unfavorable outcome, or the potential
cost of defense. In any event, management believes the state claim is covered by insurance, subject to the payment of
deductible amounts by the Company.

The Company is from time to time involved
in legal matters incidental to the conduct of its business and such matters can involve current and former employees and vendors.
Management does not expect these matters would have a material effect on the Company’s consolidated financial position or
results of operations.

11

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

FORWARD-LOOKING STATEMENTS

This Quarterly Report
on Form 10-Q, including particularly the Management’s Discussion and Analysis of Financial Condition and Results of Operations,
contains “forward-looking” statements within the meaning of the Private Securities Litigation Reform Act of 1995, which
provides a “safe harbor” for statements about future events, products and future financial performance that are based
on the beliefs of, estimates made by and information currently available to the management of Titanium Asset Management Corp.,
a Delaware corporation (referred to as “we,” “our” or the “Company,” and, unless the context
indicates otherwise, includes our wholly owned asset management subsidiaries, Wood Asset Management, Inc. (“Wood”),
Sovereign Holdings LLC (“Sovereign”), National Investment Services, Inc. (“NIS”) and Boyd Watterson Asset
Management, LLC (“Boyd”). We refer to Wood, Sovereign, NIS and Boyd collectively as our subsidiaries. The outcome of
the events described in these forward-looking statements is subject to risks and uncertainties. Actual results and the outcome
or timing of certain events may differ significantly from those projected in these forward-looking statements due to market fluctuations
that alter our assets under management; termination of investment advisory agreements; loss of key personnel; loss of third-party
distribution services; impairment of goodwill and other intangible assets; our inability to compete; market pressure on investment
advisory fees; problems experienced in the acquisition or integration of target businesses; changes in law, regulation or tax rates;
ineffective management of risk; inadequacy of insurance; changes in interest rates, equity prices, liquidity of global markets
and international and regional political conditions; terrorism; changes in monetary and fiscal policy, investor sentiment and availability
and cost of capital; technological changes and events; outcome of legal proceedings; changes in currency values, inflation and
credit ratings; failure of our systems to properly operate; actions taken by Clal Finance Ltd., (“Clal”), as our majority
stockholder; factors listed under “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31,
2011 (the “2011 Form 10-K”); and other factors listed in this Quarterly Report on Form 10-Q and from time to time in
our other filings with the Securities and Exchange Commission (“SEC”). For this purpose, statements relating to integrating
the operational, administrative and sales activities of our subsidiaries, earning of incentive fees, amount of future assets under
management, acquisitions of additional asset management firms and payment therefor, and anticipated levels of future revenues,
expenses or earnings, among other things; any statements using the terms “aim,” “anticipate,” “appear,”
“based on,” “believe,” “can,” “continue,” “could,” “are emerging,”
“estimate,” “expect,” “expectation,” “intend,” “may,” “ongoing,”
“plan,” “possible” “potential, “predict,” “project,” “should”
and “would” or similar words or phrases, or the negatives of those words or phrases; or discussions of strategy, plans,
objectives or goals, may identify forward-looking statements that involve risks, uncertainties and other factors that could cause
our actual results, financial condition and the outcome and timing of certain events to differ materially from those projected
or management’s current expectations. By making forward-looking statements, we have not assumed any obligation to, and you
should not expect us to, update or revise those statements because of new information, future events or otherwise.

The following discussion
is designed to provide a better understanding of significant trends related to our consolidated financial condition and consolidated
results of operations. The discussion should be read in conjunction with our condensed consolidated financial statements and notes
thereto included in this Quarterly Report on Form 10-Q, as well as the Management’s Discussion and Analysis of Financial
Condition and Results of Operations and the Consolidated Financial Statements and Notes thereto included in our 2011 Form 10-K.

General

Our principal business
is providing investment advisory services to institutional and retail clients. Our core strategy is to develop a broad array of
investment management expertise to enable us to offer a full range of investment strategies to our clients. Although we manage
and distribute a wide range of products and services, we operate in one business segment, namely as an investment advisor to institutional
and retail clients.

Through four acquisitions,
we have assembled a group of investment managers with solid long-term track records to serve as our core asset management business.
Through these investment managers, we have expertise in both fixed-income and equity investment strategies and have a client base
that extends from individuals to a range of institutional investors, as well as sub-advisory and referral arrangements with a variety
of broker-dealers. During 2009, we extended our business to include real estate investment advisory services through the hiring
of two experienced real estate investment managers. As of September 30, 2012, we had $8.7 billion of assets under management and
an additional $0.1 billion of assets, on which we earn referral fees.

12

Our asset management
services are typically delivered pursuant to investment advisory agreements we enter into with our clients. Investment advisory
fees are generally received quarterly, based on the value of assets under management on a particular date, such as the first or
last day of a quarter. Our institutional business is generally billed in arrears, whereas the retail business is generally billed
in advance. The majority of our investment advisory contracts are generally terminable at any time or on notice of 30 days or less.
The nature of these agreements, the notice periods and the billing cycles vary depending on the nature and the source of each client
relationship. Our assets under management primarily consist of fixed income and equity securities. We value substantially all fixed
income securities based on prices from independent pricing services. We value equity securities at the last closing price on the
primary exchange on which the securities are traded. The percentage of assets under management for which we estimate fair value
is not significant to the value of our total assets under management. Most of our investment advisory services are provided through
the management of separate accounts. However, some of our services are provided through private funds, which allow us to provide
our investment strategies to our institutional clients in a more cost efficient manner.

We earn incentive fees
on certain of the private funds, including one that invests in preferred stocks. Our incentive fees are measured on the absolute
investment performance over a calendar year performance period, and are subject to cumulative profit thresholds. Because investment
returns on preferred stocks can be volatile, the level of incentive fees earned can vary significantly from year to year.

We also have a referral
arrangement with a hedge fund manager through which we earn fees for referring clients to its investment vehicles. Our referral
fees are generally calculated as a percentage of the fees earned by the hedge fund manager, whose fees vary based on the assets
under its management.

Our operating revenues
are substantially influenced by changes to our assets under management and shifts in the distribution of assets under management
among types of securities and investment strategies. Our assets under management fluctuate based primarily on our investment performance
(both on an absolute basis and relative to other investment advisors) and the success of our sales and marketing efforts. A material
portion of our results will be influenced by fluctuations in world financial markets. Because they comprise the largest part of
our assets under management, the performance of U.S. fixed-income securities will generally have the greatest influence on our
financial results.

A significant portion
of our expenses, including employee compensation and occupancy, do not vary directly with operating revenues.

Company History and Development

We were incorporated
in Delaware on February 2, 2007, operating as a special purpose acquisition company. Our objective was to acquire one or more operating
companies engaged in asset management.

On June 21, 2007, we
completed a $120,000,000 private placement of units consisting of one share of our Common Stock and one Warrant. Clal became the
holder of approximately 44.1% of our Common Stock (42.8% of our voting stock) at that time as a result of the private placement.
Clal subsequently acquired more than a majority of our Common Stock on May 1, 2008 when it purchased additional outstanding shares
of Common Stock from another stockholder.

The Common Stock and
the Warrants were also admitted to trading on AIM, a market operated by the London Stock Exchange, on June 21, 2007. Each company
admitted to listing on AIM is required to have a Nomad who is responsible for, among other things, advising the company on its
responsibilities under the AIM rules for companies. Seymour Pierce Limited serves as our Nomad.

13

We used a substantial
portion of the proceeds of the private placement to acquire four asset management firms in four separate transactions. We purchased
Wood and Sovereign as of October 1, 2007, we purchased NIS as of March 31, 2008, and we purchased Boyd as of December 31, 2008.

During 2009, we extended
our business to include real estate investment advisory services through the hiring of two experienced real estate investment managers.

During 2010, we substantially
completed the reorganization of the four acquired businesses along functional lines. The reorganization allowed us to significantly
reduce our structural administrative expenses, primarily through reductions to senior management and redundant operations. Since
the acquisition of Boyd at the end of 2008, we have reduced headcount from 97 to 75 and have reduced annualized administrative
expenses from approximately $25.1 million to $20.2 million. We expect to realize the full benefit of these reductions to our structural
administrative expenses in 2012 as the severance costs and other transitional costs dissipate.

Market Developments

The fixed income market
performance during the three months ended September 30, 2012 was strong with the Barclay’s Aggregate Index increasing 1.6%
(3.8% for the comparable 2011 period) while the equity markets gained with the S&P 500 Index increasing by 6.4% (compared to
a decrease of 13.9% for the comparable 2011 period). For the nine months ended September 30, 2012, the Barclay’s Aggregate
Index gained 4.0% (6.7% for the comparable 2011 period) while the S&P 500 Index gained 16.4% (compared to a decrease of 8.7%
for the comparable 2011 period). Because fixed income strategies represent approximately 90% of our assets under management, the
fixed income markets have the most significant impact on our assets under management. Our overall investment performance resulted
in our assets under management increasing by $188.4 million, or 2.2% for the three months ended September 30, 2012 ($49.3 million,
or 0.6%, for the comparable 2011 period). For the nine month period ended September 30, 2012, our investment performance resulted
in our assets under management increasing by $448.1 million, or 5.3% ($274.3 million, or 3.4% for the comparable 2011 period).

For the three months
ended September 30, 2012, our average assets under management were up approximately 3% relative to the prior year average. For
the nine months ended September 30, 2012, our average assets under management were up approximately 2% relative to the prior year
average. For the three months ended September 30, 2012, the increase in average assets under management combined with a 7% increase
in our average fee rate resulted in a 10% increase in our investment advisory fee revenues. For the nine months ended September
30, 2012, the increase in average assets under management combined with a 5% increase in our average fee rate resulted in a 7%
increase in our investment advisory fee revenues.

Assets Under Management

Our asset management
services are delivered pursuant to investment advisory agreements with fees generally determined on a quarterly basis as a percentage
(or range of percentages) of either the beginning or the ending market value of the assets being managed. Our investment advisory
fees vary, among other things, by investment strategy and by client type. Our average fee rates for equity investment strategies
generally are higher than those for fixed income strategies. In general, our clients may terminate our services at any time with
limited notice.

We manage a portion
of our assets under management through private funds that are organized as limited liability companies. We believe the use of these
funds allows us to provide our investment strategies to our institutional clients in a more cost effective manner. We earn incentive
fees on certain of the private funds, including one that invests in preferred stocks.

14

Assets under management
of $8.7 billion at September 30, 2012 were higher than the $8.3 billion reported at December 31, 2011 primarily due to positive
investment returns. The following table presents summary activity for 2012 and 2011 periods.

Three Months Ended

Nine Months Ended

September 30,

September 30,

(in millions)

2012

2011

2012

2011

Annual Activity:

Beginning balance

$

8,575.6

$

8,402.5

$

8,316.8

$

8,125.0

Inflows

438.5

473.6

1,521.6

1,343.7

Outflows

(489.3

)

(491.0

)

(1,573.3

)

(1,308.6

)

Net flows

(50.8

)

(17.4

)

(51.7

)

35.1

Market value change

188.4

49.3

448.1

274.3

Ending balance

$

8,713.2

$

8,434.4

$

8,713.2

$

8,434.4

Average Assets Under Management (1)

$

8,644.4

$

8,418.4

$

8,548.4

$

8,351.1

(1)

Average assets under management are calculated based
on the quarter end balances.

The principle factors
affecting our net flows during the periods ended September 30, 2012 and 2011 include the following:

·

Multiemployer pension and welfare plans represent approximately 36% of our client base, and these
plans have been faced with a challenging economic environment over the last several years. The current economic environment has
generally led to reduced employer contributions and increased withdrawals. These factors have led to increased levels of outflows
from our fixed income strategies throughout the last several years. For the three months ended September 30, 2012, net inflows
from multiemployer pension and welfare plans were approximately $73 million compared to net inflows of approximately $43 million
for the prior year period. For the nine month period ended September 30, 2012, net inflows were approximately $285 million compared
to net inflows of approximately $51 million for the prior year period. The improvements in 2012 generally reflect new investments
in both a real estate strategy and a preferred stock strategy, both of which carry higher than average fee rates. The net inflows
for the nine months ended September 30, 2012 include approximately $80 million in new investments in the real estate strategy and
approximately $80 million in new investments in the preferred stock strategy.

·

Outflows for the nine month period ended September 30, 2012 include the liquidation of approximately
$375 million of investments related to the TALF investment strategy. These assets carried annualized fees of approximately $375,000.

·

Inflows and outflows are also significantly affected by the timing of tax receipts and disbursements
for several public entity accounts that we manage. Net outflows related to these accounts were $14 million for the three months
ended September 30, 2012 compared to net outflows of $90 million for the prior year period. For the nine months ended September
30, 2012 the net flows related to these accounts were approximately breakeven compared to net inflows of $72 million for the prior
year period. While these flows can fluctuate significantly from period to period, they do not have a significant impact on our
overall fees due to low or fixed fee rates.

Market
value changes reflect our investment performance. Fixed income assets comprised approximately 89% of our total assets under management
at September 30, 2012. Fixed income returns as measured by the Barclay’s Aggregate Index were 1.6% for the three months ended
September 30, 2012 (3.8% for the comparable 2011 period). For the nine months ended September 30, 2012, the Barclay’s
Aggregate Index gained 4.0% (6.7% for the comparable 2011 period). For the twelve months ended September
30, 2012, approximately 85% of our fixed income assets with defined performance benchmarks outperformed their respective benchmarks.

15

Equity
assets comprised approximately 7% of our total assets under management at September 30, 2012. Equity returns as measured by the
S&P 500 Index were up 6.4% for the three months ended September 30, 2012 (compared to a decrease of 13.9% for the comparable
2011 period). For the nine months ended September 30, 2012, the S&P 500 Index gained 16.4% (compared to a decrease of
8.7% for the comparable 2011 period). Approximately 11% of our equity assets outperformed their respective
benchmarks for the twelve months ended September 30, 2012.

The following table
presents summary breakdowns for our assets under management at September 30, 2012 and December 31, 2011.

(in millions)

September 30, 2012

% of total

December 31, 2011

% of total

By investment strategy:

Fixed income

$

7,772.4

89

%

$

7,483.4

90

%

Equity

630.3

7

%

621.4

7

%

Real estate

310.5

4

%

212.0

3

%

Total

$

8,713.2

100

%

$

8,316.8

100

%

By client type:

Institutional

$

7,571.2

87

%

$

7,178.9

86

%

Retail

1,142.0

13

%

1,137.9

14

%

Total

$

8,713.2

100

%

$

8,316.8

100

%

By investment vehicle:

Separate accounts

$

7,950.7

91

%

$

7,540.2

91

%

Private funds

762.5

9

%

776.6

9

%

Total

$

8,713.2

100

%

$

8,316.8

100

%

Our mix of assets under
management by investment strategy was relatively unchanged as fixed income assets comprised 89% of total assets under management
at September 30, 2012 compared to 90% at December 31, 2011.

Our mix of assets under
management by client type was relatively unchanged as institutional accounts comprised 87% of total assets under management at
September 30, 2012 compared to 86% at December 31, 2011.

Our mix of assets under
management by investment vehicle was unchanged as separate accounts comprised 91% of total assets under management at September
30, 2012 and December 31, 2011.

As of October 31, 2012,
our aggregate assets under management increased to approximately $8.8 billion.

16

We earn referral fees
on clients referred to a hedge fund manager with whom we have a referral arrangement. The assets managed under this referral arrangement
decreased from $374.0 million at December 31, 2011 to $140.0 million at September 30, 2012. The activity related to these referred
assets was as follows:

For the Three Months Ended

For the Nine Months Ended

September 30,

September 30,

(in millions)

2012

2011

2012

2011

Annual Activity:

Beginning balance

$

199.1

$

814.7

$

374.0

$

894.4

Inflows

-

-

-

8.2

Outflows

(61.8

)

(80.1

)

(242.9

)

(163.5

)

Market value change

2.7

1.9

8.9

(2.5

)

Ending balance

$

140.0

$

736.5

$

140.0

$

736.5

Average Referred Assets Under Management

$

169.6

$

775.6

$

274.0

$

838.5

The assets under this
referral arrangement have decreased significantly over the last two years for a variety of factors and as a result, our referral
fees have been substantially reduced. In September 2012, the hedge fund manager announced that it would complete an orderly liquidation
of the remaining assets of the primary fund in which the majority of the referred assets are invested. As a result, we expect that
the referred assets and referral fees will be substantially eliminated as of December 31, 2012.

17

Results of Operations

Consolidated Results
of Operations

Three Months Ended

2012

Nine months Ended

2012

September 30,

vs.

September 30,

vs.

2012

2011

2011

2012

2011

2011

Operating revenues

$

5,779,000

$

5,390,000

7

%

$

16,730,000

$

16,292,000

3

%

Operating expenses:

Administrative

5,051,000

5,491,000

-8

%

15,210,000

16,258,000

-6

%

Amortization of intangible assets

2,401,000

1,391,000

73

%

7,203,000

4,000,000

80

%

Impairment of goodwill

-

-

NM

-

3,500,000

NM

Total operating expenses

7,452,000

6,882,000

8

%

22,413,000

23,758,000

-6

%

Operating loss

(1,673,000

)

(1,492,000

)

12

%

(5,683,000

)

(7,466,000

)

-24

%

Other income

213,000

(74,000

)

NM

519,000

390,000

33

%

Net income (loss)

$

(1,460,000

)

$

(1,566,000

)

-7

%

$

(5,164,000

)

$

(7,076,000

)

-27

%

Net income (loss) per share

Basic

$

(0.07

)

$

(0.08

)

-13

%

$

(0.25

)

$

(0.34

)

-26

%

Diluted

$

(0.07

)

$

(0.08

)

-13

%

$

(0.25

)

$

(0.34

)

-26

%

NM: Not meaningful

The decrease in the
net loss for the three months ended September 30, 2012 compared to the three months ended September 30, 2011 is primarily attributable
to the following:

·

An increase in operating revenues of $389,000, or 7%, as a $529,000 increase in investment advisory
fees was partially offset by a $140,000 decrease in referral fee revenue. The increase in investment advisory fees reflects both
an increase in average assets under management and an improved average fee rate. The reduction in referral fees primarily reflects
a reduction in assets under management under the referral arrangement.

·

A decrease in administrative expenses of $440,000, or 8%. The reduction primarily reflects reduced
severance costs.

·

An increase in amortization charges of $1,010,000, reflecting the reduced estimated remaining life
for the referral relationship intangible asset beginning in the fourth quarter of 2011.

·

A $287,000 increase in other income primarily as a result of improved returns from our equity investments
in one of our managed funds.

The decrease in the
net loss for the nine months ended September 30, 2012 compared to the nine months ended September 30, 2011 is primarily attributable
to the following:

·

An increase in operating revenues of $438,000, as a $1,120,000 increase in investment advisory fees
was partially offset by a $682,000 decrease in referral fee revenue. The increase in investment advisory fees reflects both an
increase in average assets under management and an improved average fee rate. The reduction in referral fees reflects both a reduction
in assets under management under the referral arrangement and a reduction in fees charged by the hedge fund manager.

·

A decrease in administrative expenses of $1,048,000, or 6%. The reduction primarily reflects lower
compensation costs as a result of reduced staff and reduced severance costs and lower professional fees.

·

An increase in amortization charges of $3,203,000, reflecting the reduced estimated remaining life
for the referral relationship intangible asset beginning in the fourth quarter of 2011.

·

A goodwill impairment charge of $3,500,000 recognized in 2011, primarily due to the long-term impact
of the reductions to the referral revenue stream with respect to the referral relationship.

·

A $129,000 increase in other income primarily as a result of improved returns from our equity investments
in two of our managed funds.

18

In evaluating operating
performance, we consider operating income and net income, which are calculated in accordance with accounting principles generally
accepted in the United States (“GAAP”), as well as Adjusted EBITDA, an internally derived non-GAAP performance measure.
We define Adjusted EBITDA as operating income or loss before non-cash charges for amortization and impairment of intangible assets
and goodwill, depreciation, and share compensation expense. We believe Adjusted EBITDA is useful as an indicator of our ongoing
performance and our ability to service debt, make new investments, and meet working capital requirements. Adjusted EBITDA, as we
calculate it, may not be consistent with computations made by other companies. We believe that many investors use this information
when analyzing the operating performance, liquidity, and financial position of companies in the investment management industry.

The following table
provides a reconciliation of operating loss to the Adjusted EBITDA for the periods ended September 30, 2012 and 2011.

Three Months Ended

Nine Months Ended

September 30,

September 30,

2012

2011

2012

2011

Operating loss

$

(1,673,000

)

$

(1,492,000

)

$

(5,683,000

)

$

(7,466,000

)

Amortization of intangible assets

2,401,000

1,391,000

7,203,000

4,000,000

Impairment of goodwill

-

-

-

3,500,000

Depreciation expense

33,000

34,000

96,000

89,000

Adjusted EBITDA (deficit)

$

761,000

$

(67,000

)

$

1,616,000

$

123,000

The improvements to
Adjusted EBITDA in the 2012 periods primarily reflect the increases in operating revenues and the reductions in administrative
expenses.

19

Operating Revenues

Our operating revenues
include investment advisory fees received for the management of assets within separate accounts and private funds. Our operating
revenues also include referral fees earned in connection with NIS’s referral arrangement with an unaffiliated hedge fund
manager. Operating revenues increased by $389,000, or 7%, in the three months ended September 30, 2012 and by $438,000, or 3%,
in the nine months ended September 30, 2012. The changes by revenue category are more fully described below.

Three months ended

2012

Nine months ended

2012

September 30,

vs.

September 30,

vs.

2012

2011

2011

2012

2011

2011

Investment advisory fees

$

5,715,000

$

5,186,000

10

%

$

16,467,000

$

15,347,000

7

%

Referral fees

64,000

204,000

-69

%

263,000

945,000

-72

%

Total operating revenues

$

5,779,000

$

5,390,000

7

%

$

16,730,000

$

16,292,000

3

%

Average Assets Under Management (in millions)

$

8,644.4

$

8,418.4

3

%

$

8,548.4

$

8,351.1

2

%

Average Fee Rate (basis points)

26.4

24.6

7

%

25.7

24.5

5

%

Average Referred Assets Under Management (in millions)

$

169.6

$

775.6

-78

%

$

274.0

$

838.5

-67

%

Average Referral Fee Rate (basis points)

14.9

10.5

42

%

12.8

15.0

-15

%

For the three month
periods, our investment advisory fees increased by $529,000, or 10%, due to a 3% increase in our average assets under management
and a 7% increase in our average fee rate. For the nine month periods, our investment advisory fees increased by $1,120,000, or
7%, due to a 2% increase in our average assets under management and a 5% increase in our average fee rate.

For the three month
periods, our referral fees decreased by $140,000, or 69%, primarily due to a 78% decrease in the average assets under the referral
arrangement. For the nine month periods, our referral fees decreased $682,000, or 72%, due to a 67% decrease in the average assets
under the referral arrangement and a 15% decrease in our average referral fee rate.

The assets under this
referral arrangement have decreased significantly over the last two years for a variety of factors and as a result, our referral
fees have been substantially reduced. In September 2012, the hedge fund manager announced that it would complete an orderly liquidation
of the remaining assets of the primary fund in which the majority of the referred assets are invested. As a result, we expect that
the referred assets and referral fees will be substantially eliminated as of December 31, 2012.

We also receive incentive
fees on an annual basis from the management of certain of our private funds, including one that invests in preferred stocks. Because
investment returns on preferred stocks can be volatile, the level of incentive fees earned can vary significantly from year to
year. These fees generally are based on a calendar year performance period and we recognize the fees at the conclusion of the performance
period. In 2011, we earned incentive fees of $262,000, which were recognized in December 2011. Based on performance through September
30, 2012, we would have earned incentive fees of approximately $900,000, but results for the first nine months of the year are
not necessarily indicative of results to be expected for the full year.

20

Administrative
Expenses

Administrative expenses
for the three month period ended September 30, 2012 decreased by $440,000, or 8%, compared to the 2011 period. Administrative expenses
for the nine month period ended September 30, 2012 decreased by $1,048,000, or 6%, compared to the 2011 period. The decreases are
largely due to reduced provisions for severance. Other changes by expense category are more fully described below.

Three months ended

2012

Nine months ended

2012

September 30,

vs.

September 30,

vs.

2012

2011

2011

2012

2011

2011

Employee compensation:

Recurring compensation

$

2,925,000

$

2,857,000

2

%

$

8,876,000

$

9,172,000

-3

%

Severance costs

91,000

469,000

-81

%

91,000

469,000

-81

%

Total compensation

3,016,000

3,326,000

-9

%

8,967,000

9,641,000

-7

%

Third party distribution expense

460,000

348,000

32

%

1,213,000

986,000

23

%

Investment management expense

400,000

402,000

-%

1,187,000

1,200,000

-1

%

Legal, audit, and other professional fees

210,000

368,000

-43

%

755,000

1,119,000

-33

%

Occupancy

277,000

283,000

-2

%

887,000

833,000

6

%

Other administrative expenses

688,000

764,000

-10

%

2,201,000

2,479,000

-11

%

Total administrative expenses

$

5,051,000

$

5,491,000

-8

%

$

15,210,000

$

16,258,000

-6

%

Employee compensation
includes salaries and wages, sales incentives and other incentive compensation, and other payroll related taxes and benefits. For
the three months ended September 30, 2012, the increase in recurring employee compensation reflects increased incentive compensation
costs. For the nine months ended September 30, 2012, the decrease in recurring employee compensation is primarily due to reduced
staff levels.

Third party distribution
expense represents payments made to broker-dealer networks and other outside sales commissions. The increases in 2012 reflect increased
levels of business conducted through a broker-dealer network and the use of a third party marketer.

Investment management
expense includes pricing, trading, compliance, and other investment management service costs and subadvisory service fees for outside
assistance in the management of certain asset classes.

The decrease in legal,
audit, and other professional fees primarily reflects reduced audit costs based on the timing of year-end audit work and reduced
legal services in 2012.

Other administrative
expenses include travel and other marketing related expenses, insurance expense, and other operating expenses. The decrease in
other administrative expenses primarily reflects reduced insurance costs that were enabled by our ability to reduce coverage levels
in the latter half of 2011.

Amortization
of Intangible Assets and Impairment of Goodwill

Amortization of intangible
assets is recognized in periods following acquisitions based on the estimated useful lives of the respective assets. We periodically
reassess the remaining useful lives of these intangible assets based on significant terminations or redemption activity that might
indicate that respective attrition rates have changed substantively. Throughout 2011, we considered the impact of recurring redemptions
of the referred assets and their impact on the remaining useful life of its NIS referral relationship intangible asset. The most
recent assessment at 2011 year end resulted in reducing the estimated remaining useful life to approximately 15 months as of October
1, 2011. The $3,203,000 increase in amortization expense in 2012 reflects these revisions to the remaining estimated useful life
of the intangible asset related to the referral relationship. As a result of the most recent revision to the estimated remaining
useful life of the NIS referral relationship intangible asset, we expect that asset will be fully amortized at the end of 2012
and that the total annual amortization expense will increase to $9,604,000 for 2012. For 2013, we expect that the total annual
amortization will decrease to $970,000.

21

Following the end of
the first quarter of 2011, we were notified by the hedge fund manager of redemptions and a reduction in its referral fee rates
that significantly exceeded the estimates that were received in connection with the 2010 year end assessment of goodwill. From
ensuing discussions with the hedge fund manager, we became aware of additional concerns with the relationship that may impact the
marketing relationship beyond the current contractual period. These factors caused us to further reduce our long-term forecast
of referral fee revenues and triggered an interim assessment of goodwill as of March 31, 2011. As a result of that assessment,
we concluded that goodwill had been impaired and recognized an impairment charge of $3,500,000 as the reduction in the forecast
long-term referral fee revenues had resulted in a reduced estimate of our value.

Other Income
and Expense

Other income and expense
includes investment income from the investment of excess cash balances.

Three months ended

2012

Nine months ended

2012

September 30,

vs.

September 30,

vs.

2012

2011

2011

2012

2011

2011

Interest income

$

23,000

$

21,000

10

%

$

61,000

$

66,000

-8

%

Net realized gains (losses) on investments

13,000

(17,000

)

NM

6,000

(18,000

)

NM

Income (loss) from equity investees

177,000

(78,000

)

NM

452,000

342,000

32

%

Total other income (expense)

$

213,000

$

(74,000

)

NM

$

519,000

$

390,000

33

%

We earn interest income
and realize investment gains or losses on a portfolio of debt securities managed to enhance our yield on cash not immediately needed
for operations.

Income (loss) from
equity investees represents our share of the net income or loss of two investments in affiliates.

Our investment in affiliates
includes an investment in the Titanium TALF Opportunity Fund (the “TALF Fund”), which we organized for our clients
to invest primarily in securities participating in the Term Asset-Backed Securities Loan Facility of the Federal Reserve Bank of
New York. We are the managing member of the TALF Fund and serve as the investment manager for the TALF Fund for which we receive
management fees. Because we have an equity interest in the TALF Fund and have significant influence over the TALF Fund’s
daily activities through our role as managing member and investment manager, we account for this investment using the equity method
of accounting.

During June 2012, substantially
all of the TALF Fund securities were liquidated and converted to cash equivalents. The remaining assets of the TALF Fund were distributed
to the respective investors, including the Company in September 2012.

Our investment in affiliates
also includes our investment in the Titanium Absolute Return Fund (formerly, the NIS Fixed Income Arbitrage Fund, LTD.) (the “TARF
Fund”). We are the managing member of the TARF Fund and serve as the investment manager for the TARF Fund for which we receive
management fees. As of September 30, 2012, our investment in the TARF Fund represented approximately 14% of the net assets in the
TARF Fund. Because we have an equity interest in the TARF Fund and have significant influence over the TARF Fund’s daily
activities through our role as managing member and investment manager, we account for this investment using the equity method of
accounting.

22

Liquidity and Capital Resources

At September 30, 2012,
we had $12,177,000 of funds available consisting of $3,210,000 of cash and cash equivalents, $5,089,000 of securities available
for sale, and $3,878,000 invested in one of the private funds that we manage. At December 31, 2011, these combined balances
were $10,484,000. The $1,693,000 increase primarily reflects cash provided by operating activities.

Nine months ended September 30,

2012

2011

Net cash provided by operating activities

$

1,389,000

$

1,026,000

Net cash used in investing activities

$

(966,000

)

$

(4,777,000

)

Net cash provided by
operating activities was $1,389,000 for the nine months ended September 30, 2012; an increase of $363,000 compared to the net cash
provided by operating activities during the nine months ended September 30, 2011. The improvement primarily reflects increases
in operating revenues, reductions in administrative expenses, and an increase in investment income.

Net cash used in investing
activities during the nine months ended September 30, 2012 primarily reflects a net increase in other invested assets. Net cash
used in investing activities during the nine months ended September 30, 2011 primarily reflects a payment of $4,000,000 for the
final obligation related to our acquisition of Boyd and a net increase in other invested assets.

As of September 30,
2012, we have no further current or contingent financial obligations due under our acquisition agreements.

We believe our current
level of cash and cash equivalents and short-term securities available for sale are sufficient to fund our ongoing operations and
to provide consideration for additional acquisitions. We may fund future acquisitions (if any) partly through issuance of additional
common stock, although we may incur bank debt as well.

Critical Accounting Policies

Our condensed consolidated
financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America.
Preparation of these statements requires us to make judgments and estimates. Some accounting policies have a significant impact
on amounts reported in these financial statements. A summary of significant accounting policies and a description of critical accounting
estimates may be found in our 2011 Form 10-K in the Notes to the Consolidated Financial Statements and the Critical Accounting
Estimates section of Management’s Discussion and Analysis of Financial Condition and Results of Operations.

23

Recent Accounting Pronouncements

There were no new accounting
standards and amendments to standards that first became effective for the fiscal year beginning January 1, 2012 that had a significant
impact on the Company’s financial statements.

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

Not
applicable.

Item 4.

Controls and Procedures

Evaluation of disclosure
controls and procedures. Based on the evaluation of our disclosure controls and procedures (as defined in the Rules 13a-15(e)
and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), required by Exchange Act
Rules 13a-15(b) or 15d-15(b)), our principal executive officer and principal
financial officer have concluded that our disclosure controls and procedures were effective as of the end of the period covered
by this report to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange
Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and include
controls and procedures designated to ensure that information required to be disclosed by us in such reports is accumulated and
communicated to our management, including the principal executive officer and principal financial officer, as appropriate to allow
timely decisions regarding required disclosure.

Changes in internal
control over financial reporting. There were no changes in our internal control over financial reporting that occurred during
the three months ended September 30, 2012 that have materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.

Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2

Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101*

Furnished with this quarterly report on Form 10-Q are the following documents formatted in XBRL (Extensible Business Reporting Language): (i) the Condensed Consolidated Balance Sheets at September 30, 2012 and December 31, 2011, (ii) the Condensed Consolidated Statements of Operations for the three and nine month periods ended September 30, 2012 and 2011, (iii) the Consolidated Statements of Comprehensive Loss for the three and nine month periods ended September 30, 2012 and 2011, (iv) the Consolidated Statements of Changes in Stockholders’ Equity for the nine month periods ended September 30, 2012 and 2011, (v) the Condensed Consolidated Statements of Cash Flows for the nine month periods ended September 30, 2012 and 2011, (vi) Notes to Condensed Consolidated Financial Statements, and (vii) document and entity information.

* The information in these exhibits shall
not be deemed to be "filed" for purposes of Section 18 of the Securities Exchange Act of 1934 or otherwise subject to
liability under that section, and shall not be incorporated by reference into any registration statement or other document filed
under the Securities Act of 1933, except as expressly set forth by specific reference in such filing.

25

SIGNATURES

Pursuant to the requirements
of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.

Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2

Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101 *

Furnished with this quarterly report on Form 10-Q are the following documents formatted in XBRL (Extensible Business Reporting Language): (i) the Condensed Consolidated Balance Sheets at September 30, 2012 and December 31, 2011, (ii) the Condensed Consolidated Statements of Operations for the three and nine month periods ended September 30, 2012 and 2011, (iii) the Consolidated Statements of Comprehensive Loss for the three and nine month periods ended September 30, 2012 and 2011, (iv) the Consolidated Statements of Changes in Stockholders’ Equity for the nine month periods ended September 30, 2012 and 2011, (v) the Condensed Consolidated Statements of Cash Flows for the nine month periods ended September 30, 2012 and 2011, (vi) Notes to Condensed Consolidated Financial Statements, and (vii) document and entity information.

* The information in these exhibits shall
not be deemed to be "filed" for purposes of Section 18 of the Securities Exchange Act of 1934 or otherwise subject to
liability under that section, and shall not be incorporated by reference into any registration statement or other document filed
under the Securities Act of 1933, except as expressly set forth by specific reference in such filing.

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